What was the Mortgage Assets Purchases Plan

January 26, 2010

The subprime mortgage crisis not only devastated the US economy but also caused an economic downturn throughout the world. A bailout plan was considered for this crisis and eventually was enacted as the Emergency Economic Stabilization Act of 2008. This law authorized the United State Treasury Department to purchase $700 billion worth of mortgage-backed securities which were troubled. The word troubled denotes that the original mortgage was facing foreclosure and there was no way of recovering the lent amount under the present economic situation even if the property was sold.


These troubled mortgage-backed securities cannot be easily converted into cash and hence the institutions holding them were headed for a massive loss. To stop this from happening these mortgage asset purchases would be made by the Treasury and thus increase the cash flow in the secondary mortgage markets. The stock market had slumped terribly due to the subprime mortgage crisis and this proposal was very much welcomed by the investors.

The government saw the Mortgage Assets Purchase Plan more as an investment rather than an expense. The underlying mortgages of the Mortgage Based Securities (MBS) generate an income based on the monthly payments of these mortgages. This income is supposed to offset the initial amount the government is planning to spend on the purchases. Also the government estimates that the MBS can be sold at a profit or at par, which will further offset the public debt brought about by these purchases.

A major challenge faced by the governing bodies was fixing the correct value of the MBS as a purchase price. The difficulty lies in the fact that there are too many variables governing the housing market and also it is difficult to gauge the quality of credit of the actual mortgages. The offsetting of the public debt will mainly depend on this purchase price which is to be fixed for the MBS. In the second quarter of 2008, Merrill Lynch had written down the value of its MBS holding by 78%, and if this is the trend, the question remains whether the government will be able to sell the MBS at a good price or it will just continue to depend on the inflow from mortgage payments.


In the start of 2009 the Treasury Secretary proposed to employ $300 billion in the TARP funds, in helping willing investors to purchase the troubled assets which were the mortgage backed securities from banks. Many people were of differing opinions and were not sure whether the tax dollar was being used to overpay for the troubled assets. Many analysts felt that the banks would not sell these assets under the prevailing market values as it would involve writing down the assets to quite an extent. Others believed that coming down to the correct value and selling these assets would end the high volatility of the bank’s stocks and will produce a conductive environment to instill confidence among the public. On the other hand the banks would prefer to have the volatility as it is advantageous as a call option to the stock prices

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Written by Uncle Sam · Filed Under Mortgage and Loan 

Comments

2 Responses to “What was the Mortgage Assets Purchases Plan”

  1. Arnold on January 30, 2011 at 11:49 am

    Eric..I agree that while we (the American people) are asked to sacrifice and “live” within our means for fear of having our homes taken away from us or having our salaries garnished by predatory lenders, the most affluent in this country are ripping us off by any means possible. But please don’t get fooled by th propaganda. This bank bail out was orchestrated by George Bush right before he left office and it was under the Emergency Economic Stabilization Act of 2008 which was signed by a Republican president and a Republican controlled Congress and Senate. That was the reason for the huge election upsets when Obama became president and the Democrats took both houses. As a Republican myself I hate the hypocrisy of our ‘leaders’ saying it is the Democrats fault when the fault is on both sides. Republicans for initiating this huge money grab for Investment leaders that should be in jail and the Democrats for not putting a stop to this and letting the money be put to better use (not necessary Healthcare, although Social Sec/Medicare/Defense spending need to be SERIOUSLY addressed). If your bank went under you are insured up to $200,000 I believe, if your bank went under because your bank president was not following his fiduciary responsibility to protect our money which was under his care then he should be in jail for writing loans to people who wouldn’t qualify to borrow $50 let alone $500,000.

    You might get the idea that I don’t like George Bush and you would correct. As a fiscal conservative I didn’t think it was prudent to ‘give back our money’ as a campaign promise. We all got a check for $300 dollars when he was elected. Lot of good that did, he basically took all of our savings out of the bank and gave it to the kids to spend. Would you do that with your savings or would you keep it for a rainy day (911)? This is basic stuff yet we as a country focus too often on our parties and not what our leaders are doing. Time to hold them accountable for their actions.

  2. Eric schmidt on January 30, 2010 at 10:38 pm

    This was just money injection into bankers pocket. we have not seen any money of this and it did not help us get more credit and acess to more money to help us pay our bills and debts. I live on a 800$ a month salary and cannot really afford everuthing i would want, even more foods. I eat the basics but sometime have to borrow to be able to eat. While big bankers who spend money like crazy, and then get save by government money and then they pay themselves big bonuses. This is ridiculous. Obama is not thinking if us but to protect the money market and their bankers who steal from us with high interest rates and service fees.

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